The Tax Attic – June 11, 2009

Options for Social Security problem

Social Security-it’s an entitlement program that we have gotten used to participating in. Those of us lucky enough to be still working participate by paying in Social Security tax. Most of us age 62 or older and those taxpayers who are disabled participate by receiving benefits. The problem that has been developing since the late 1970s is that more people are going to participate by receiving benefits than participate by paying into the system.

In 1983, Ronald Reagan convinced Congress to gradually increase the age at which taxpayers can receive full benefits as well as reduce the benefits that taxpayers will receive if they opt to begin receiving early benefits at the age of 62. Since 1983, the only changes made have been to increase the amount of earnings upon which Social Security tax will be paid. That maximum amount for 2009 is $106,800. In 1983, the maximum was $35,700, so that has been a huge change.

Unfortunately, that is not enough change. Social Security is slated to be completely bankrupt by 2037 unless more changes are made. If nothing is done, what exactly will happen in 2037? What will the federal government do?

Apparently, they will have three options. Option one is the federal government quits paying benefits, but it also quits collecting the tax. It’s not realistic to presume the federal government would voluntarily stop collecting any tax, let alone Social Security tax. “Fat chance” might say it all. Option one of not paying benefits and not collecting tax won’t happen.

Option two is benefits would be decreased to equal the level of revenue. In other words, the dollar amount of benefits would be adjusted down or up, based on the amount of Social Security tax collected. The downward adjustment could be anywhere from 30 to 60 percent. Taxpayers receiving a $1,000 benefit would have their benefit reduced down to $300 or $600. Can you say the word “rebellion”?

Option three is the federal government continues to pay the same benefits while just printing money. As we are seeing, they are proving to be very good at printing money. Going in the hole by a trillion or two doesn’t bother the present administration, but we will have to wait and see how much it bothers the 2037 administration!

So, what changes can be made to keep Social Security solvent? There are also three options available here and perhaps they have to be blended to make it all work out.

First, the age of drawing a full benefit can be increased. In conjunction with that change, the amount to be drawn at the reduced benefit age of 62 would be drastically reduced down to 50% from the present 80% or being able to draw early could even be eliminated altogether.

Second, the maximum amount of earnings subject to Social Security tax could be changed so that all earnings are subject to Social Security. There would be no maximum. Make $500,000 in wages; pay Social Security tax on the whole amount. Granted, this would apply to only a select number of people making more than the present maximum of $106,800, but it would bring some money into the coffers.

Third, and this would be very controversial, eliminate or phase-in the ability to draw disability Social Security. As the program was set up in 1935 by the Franklin Roosevelt administration, there was no disability Social Security. Social Security was a retirement program based on drawing benefits at the age of 65 or 62 at the earliest. In the 1960s, the ability to draw a benefit based on disability was introduced into the program. At the time, the Social Security trust fund was flush with money. It was at the height of the baby boomers working. They were in their peak earning years and paying in at the maximum. By the way, that maximum was $4,800 in 1965. President Johnson and Congress felt the trust fund could withstand disability benefits. It could in the 1960s. Today, it can’t and certainly won’t in 2037.

I believe there will be a blend of all three. The ages will increase, the benefits will decrease, and disability will be difficult to obtain. This is Jerry Coon signing off.

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